• Fri. Sep 29th, 2023

Why Are Commercial Banks in Uganda Offering Reduced Interest Rates?

ByReal Muloodi Reporter

May 6, 2021

Commercial banks in Uganda are offering reduced interest rates on loans to entice business and salaried customers, according to the Daily Monitor.

Banks have always strived to lend to the private sector. However, the COVID-19 pandemic’s impact on the economy hampered their efforts. Low economic activity resulted in sluggish growth in private sector credit. As a result, commercial banks sat on plenty of liquidity for almost a year.

Considering this, banks are now launching tailored loan campaigns, with the enticement of lower interest rates for borrowers who take out new or additional credit facilities during the campaign time. For example, Stanbic Bank promised borrowers loans at 15.9 per cent from February to May to finance their businesses, the Daily Monitor reports.

According to Dr. Adam Mugume, the Executive Director of Research at Bank of Uganda (BOU), several factors have increased the appetite of banks to lend to the private sector:

1. Government securities are not as profitable

Typically, banks like to lend to the government because it offers a risk-free return. Whereas lending to the private sector carries a default risk. However, yields on government securities have reduced and are no longer as profitable. For instance, the yield on the 364-day Treasury bill has come down from heights of 13.8 per cent in Jan 2021 to 11.4 per cent in May 2021. As government Treasury bills and bonds rates continue to fall and profits continue to shrink, banks turn their focus to the private sector.

2. Increase in the demand for credit

Demand for credit has increased as businesses rebound from COVID-19 restrictions. The increase in new loan applications illustrates this. New loan applications in June 2020 amounted to Shs994 billion. This amount has increased to an average of Shs1.4 trillion each month over the last five months, Dr. Mugume says.

According to Ms. Patricia Amito, head of communications and corporate affairs at the Uganda Bankers Association (UBA), demand for credit drives lending.

“With the lifting of lockdown, demand for credit is gradually growing, because businesses are picking up once again,” she says.

Risk averseness is also slowly declining as the economy rebounds from the pandemic, which has stimulated credit expansion.

Mr Jackson Emanzi, head of lending products at Stanbic Bank, referenced the importance of lending to stimulate economic activity and recovery. He noted that the low-interest rate pricing is to encourage potential borrowers with urgent cash needs to approach the bank for relief.

“These loans are a crucial financial service that can help boost businesses and enhance the speedy recovery of the economy,” Mr Emanzi said.

According to the Daily Monitor, whenever you want to borrow money from a bank, interest rates are one of the most crucial things to watch for. Although interest rates are very competitive between banks, they do vary from one bank to another. With several lending campaigns from the leading banks on offer, borrowers should pay attention to the interest rates.

Once economic activity and demand returns to pre-Covid-19 levels, the expectation is that lending to the private sector will increase. Consequently, so will the lending rates.


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